What happened to the U.S. economy? Two years ago, we were in the middle of an economic boom. Banks were eager to lend even at the cost of forgoing important covenants, and corporate America (and the entire world) was producing at full steam, so much so that commodities prices were rising in anticipation of a future scarcity.
Neoclassical economic models cannot explain the deep recession we are quickly sliding into. There was no apparent shock to productivity nor a clear slowdown in innovation. The government has kept taxes low. The Federal Reserve has kept interest rates low and cut them even further. Yet, everyone agrees that this crisis originated in the financial system.
Why? Because something important was destroyed in the last few months. It is an asset crucial to production, even if it is not made of bricks and mortar. This asset is TRUST.
While trust is fundamental to all trade and investment, it is particularly important in financial markets, where people depart with their money in exchange for promises.
To study how recent events have undermined Americans’ trust in the stock markets and institutions in general, we have launched the Chicago Booth/Kellogg School Financial Trust Index.